Due to recent conversations that I’ve had with clients in friends, I’ve been thinking a lot about consumer behavior surrounding discounted items. One of my clients attests the following, which I found the be pretty interesting:
The current emphasis on web coupons and social site tie ins neglects another fundamental rule of retailing: guaranteed value. We tend to buy high-priced items at discount because we perceive that we are getting a good deal. But the same psychology works in reverse sometimes. We believe we are being overcharged unless we are getting a discount. Without guaranteed value, we tend to decide to purchase at the last moment, or decide not to purchase in advance because we assume or fear the price will be too high.
In this argument, he goes on to note spending habits on airline tickets, hotel rooms, Netflix and other luxury items like those offered by Groupon. Granted, I’m giving you a snippet of this client’s argument without the full context, but the point is pretty clear. The notion of discounts genuinely changes buying habits for certain items and services. It’s absolutely true that I may decide which mode of transportation (much less which airline) to book for a family vacation. The airline industry, particularly with the emergence of discount fliers like Ryan Air and jet blue, show a pristine example of buying habits and how discounts dissuade consumers from spending money on what once was a pretty average price. However, this mentality certainly doesn’t work for all purchases.
Let’s think a little about coffee, for instance. Anyone that has stepped foot into a Starbucks can tell you that they’re paying more for a cup of coffee than they would elsewhere. And though Starbucks might like you to believe that the extra dollar goes to sustainable farming and fair trade agreements, their colossal boom over the last decade makes an inflated profit margin seem pretty evident. So does the above argument really apply here?
Panera Bread offers the MyPanera program. Starbucks Coffee offers the My Starbucks Rewards program. With MyPanera, in the past month, I’ve gotten 2 free cups of coffee, 1 free large mocha latte, and 3 free pastries. This is a lot, considering that I’ve only been here 5 times. But the idea of getting something for free is a novel one. Starbucks, on the other hand, recently canceled their program where all purchases made on their card were automatically rewarded a 10% discount. They’ve since reloaded the program to allow coffeeaholics to get their 10th cup for free — akin to the Subway Sandwich stamp program of the mid-90s. They also offer free select syrups and milk (which is laughable, at best), free refills on drip coffee and tea (which Panera offers all the time, card or no card) and a free coffee with the purchase of a pound of their overpriced ground coffee.
Pretending that I’m hiding the editorializing, here, which do you think is more alluring to customers? Which would be more attractive to inspiring first time customers to return? Which would enable building allegiance to regulars who still sip from competitive cups? Which is more interested in building a dedicated customer base by matching their clienteles’ commitment? To me, the answer is quite clear.
I have never in my 32 years seen any franchise automatically give you something free, simply by walking in the door. It has always been: the sixth foot-long is free, the 11th coffee is free, you need an oil change before you get an air freshener, you need an entree before you get the breadsticks, you can rarely even use a bathroom in NYC without purchasing something first. In order to get something from the dollar menu at Burger King, McDonald’s or Wendy’s, you still need to fork over a buck. So when Panera Bread, whom I’d seldom visited and whose franchises are often staggered around Starbucks themselves, offered me a card with a message that said “we can’t quite tell you what benefits you’ll get with this card, yet,” naturally I was skeptical of it’s value. I calculate that in five visits, I’ve saved over $10 so far and didn’t spend a cent on two of them. I’m lucky to leave Starbucks on any one occasion without spending at least $10 on a coffee and pastry.
My guess at why Panera can’t clearly outline the benefits of their MyPanera program is that they don’t know yet how popular it could become. When Subway offered their select $5 foot-longs for two months, I doubt anyone had a clue how incredibly profitable it would become for the franchise ($3.8 billion, to be precise, by this time last year). And Starbucks, whose rewards program has diluted and diluted their benefits over the last few years, has simply followed their corporate philosophy of self-cannibalism (see “No Logo” by Naomi Klein) to learn the least they could offer while still making their rewards customers infer value (Starbucks is now up to 193 locations on the island of Manhattan alone. That’s 8 locations per square mile!).
Coffee is one thing, though. People tend to believe a cup of joe should be aroun $1. If it’s anything more, I presume that a grumbling caffeinated public will jadedly slurp. A sandwich’s perceived value is wholly dependent on the ingredients and the quality of the establishment. As my friend Hans once said “You can pay $5 for that if you want. I’m going across the street.” But a flight, a hotel room, a spa treatment and a yoga class may have a much more amorphous value assessment. This is what I believe has helped Groupon to become the fastest growing company in history (Forbes, August 2010). If I tell you a spa treatment is worth $50, you’d be excited to get a $25 discount from Groupon. If I told you it was worth $500, you’d be raving about a $250 discount, if the balance was still within your price range. And, to my client’s argument, you may even be more likely to spend $250 instead of $25 because you believe you’re getting a much better bargain. With floating value products, Groupon is king. But Groupon will never call you and tell you you can get a Venti Coffee for half price, if the half price is still $2. When it comes to some products, the public’s intuition still reigns supreme.